Solutions Manual for Financial Accounting for MBAs 8thEdition Easton
Business Environment for Financial Reporting
Harley-Davidson is a Fortune 500 company and has been the historical market share leader in the
U.S. 601+cc motorcycle market. The company’s products are sold through a network of independent
dealers, of which the majority sell Harley-Davidson motorcycles exclusively. These dealerships stock
and sell the company’s motorcycles, parts and accessories, general merchandise and licensed products,
and perform service on Harley-Davidson motorcycles. In 2018, Harley reported 1,535 dealerships, 691
(45%) of which are located in the U.S.
Harley reports two business segments: the manufacturing company and the financial services
subsidiary. Harley-Davidson Financial Services is engaged in the business of financing and servicing
wholesale inventory receivables and retail consumer loans, primarily for the purchase of HarleyDavidson
motorcycles. Its wholesale activities include financing for its dealers for the purchase of
motorcycles
for display,
and its financing activities provide loan and lease financing to customers. This
financial
services subsidiary operates like a bank, borrowing money at a given rate to fund the lease
receivables
and
setting
a
higher
rate
on
its
loans
and
leases.
As
is
common
for
all
lenders,
managing
the
spread between lease income and interest expense and minimizing credit losses are core activities
for
Harley-Davidson Financial Services.
In the MD&A section of its 10-K, Harley-Davidson describes its competitive environment as
follows.
Competition in the segments of the motorcycle market in which the Company currently competes is
based upon a number of factors including product capabilities and features, styling, price, quality,
reliability, warranty, availability of financing, and quality of the dealer network that sells the product.
The Company believes its motorcycles continue to generally command a premium price at retail
relative to competitors’ motorcycles. The Company emphasizes remarkable styling, customization,
innovation, sound, quality and reliability in its products and generally offers a two-year warranty for
its motorcycles. The Company considers the availability of a line of motorcycle parts & accessories
and general merchandise, the availability of financing through HDFS and its global network of independent
dealers to be competitive advantages.
Although dominant in the U.S. market (accounting for approximately 50% of new motorcycle registrations),
Harley-Davidson faces stiff
competition outside of the U.S. where it has only a 10% market
share.
With
this as background, we begin the accounting analysis of Harley-Davidson
by discussing
its
financial statements.